A Future After Foreclosure

Despite the no-down payment benefit, VA loans have emerged as a model of stability and safety. They continue to have an incredibly low foreclosure rate, due in large part to the VA’s common-sense requirements and commitment to helping veterans keep their homes. But default does happen.

Foreclosure, short sale or deed-in-lieu of foreclosure can all take a toll on your credit score. Plus, whatever VA loan entitlement you used on the foreclosure is effectively lost. The only way to get it back is to repay the amount in full, which isn’t something most people can or want to do.

But VA borrowers who lose a home to foreclosure or one of its offshoots can absolutely look to purchase again using the VA loan program. You’ll typically need to wait two years after a foreclosure or short sale in order to pursue another VA loan.

You’ll also need to rely on whatever VA loan entitlement you have remaining. Let’s take a closer look at how you could utilize another VA loan after losing one to foreclosure.

Second-Tier Entitlement

The VA backs a portion of every loan. That backing, known as a guaranty, is reflected in a dollar amount called “entitlement.” Your amount of entitlement in part determines how much you could potentially borrow before having to factor in a down payment.

There are two layers of entitlement, a basic and a bonus, or secondary, level. The basic entitlement is $36,000. For borrowers in most parts of the country, there’s an additional, second tier of entitlement currently worth $85,087. Add those together and you get $121,087. That’s the maximum entitlement for VA buyers in all but the country’s most expensive housing markets.

Because the VA typically guarantees a quarter of the loan, a qualified borrower with full entitlement can borrow up to $484,350 ($121,087 x 4) before having to factor in a down payment. That figure is the VA loan limit for most parts of the country. These limits don't represent a cap on how much you can borrow, but the limit in your county can play a big role in your purchasing situation post-foreclosure.

For example, let’s say you purchased a home a few years ago in a non-high-cost county for $200,000. Because the VA typically backs a quarter of the loan, you used $50,000 of your VA loan entitlement. A few years later, you lose the home to foreclosure. You also lose the $50,000 in entitlement.

But you would still have a fair bit left. In this example, you would have $71,087 ($121,087 - 50,000) in remaining entitlement in most parts of the country. After a two-year wait, qualified buyers in most places could use their remaining entitlement to purchase up to $284,348 ($71,087 x 4) without the need for a down payment. Buyers who want to purchase above where their entitlement caps out need to put down 25 percent of the difference between their cap and the purchase price.

For example, let’s say your second-tier entitlement caps out at that $284,348 figure. You fall in love with a new home at $300,000. You would need to put down a quarter of the difference, which is $3,913 in this example ($300,000 - 284,348 = $15,652 x 25 percent).

That could still wind up being a great deal compared to conventional and FHA financing, which require minimum 5 percent and 3.5 percent down payments, respectively. The $3,913 down payment on our example $300,000 loan represents a 1.3 percent down payment. You’d also wind up paying for mortgage insurance with FHA and conventional loans.

If you’re purchasing in one of the VA’s high-cost counties, you’ll have more entitlement at your disposal. That means even more $0-down buying power.

Other Considerations

Purchasing again using your second-tier entitlement also comes with a unique caveat: You can’t have a loan amount below $144,001. VA borrowers can count their VA Funding Fee toward that total, but not any qualified energy efficiency improvements.

For veterans and service members who’ve lost a non-VA loan to foreclosure, you can typically look to obtain a VA loan once you’re two years beyond the foreclosure date. You will often need to wait three years if the default occurred on an FHA loan.

Homeowners who’ve experienced a foreclosure as part of the bankruptcy process can have different timelines and requirements. Policies and procedures often vary by lender.

When it comes to foreclosure, every buyer’s situation is different. But it’s important to understand you can bounce back. Simply having a foreclosure in your past – even one on a VA-backed loan – doesn’t automatically mean a VA loan is out of the question.

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